Isaacson Isaacson Sheridan & Fountain, LLP
January 8, 2009
Greetings,
 
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This alert, from Desmond G. Sheridan, concerns estate planning opportunities based on the new gift tax exclusions and a down market. 
 
DOWN MARKET AND NEW GIFT TAX EXCLUSION
PRESENT ESTATE PLANNING OPPORTUNITIES
 

            Most people are not now focused on "having too much money" and the need to make gifts.  However, the loss in value of the stock market and other assets, together with an increase in the gift tax annual exclusion present an opportunity to get increased leverage from gifts.
           
            The purpose of estate planning gifts is to remove assets from the donor's taxable estate.  The 2009 lifetime exemption amount for every person is $3,500,000.  There is uncertainty about whether this exclusion will be preserved in upcoming tax law changes, but the current thinking is that the $3,500,000 amount will be with us for some time.  This means that with proper planning, a married couple should be able to leave $7,000,000 in assets, without federal estate tax liability and without the necessity of making gifts.  However, for a single person whose assets are (or will be) above $3,500,000 or a married couple whose assets are (or will be) above $7,000,000, gifting can be a powerful way to reduce estate tax liability.
 
            The annual exclusion gift amount (the amount which any person can gift to any other person free of federal gift tax) has been increased to $13,000 in 2009.  Of course, when asset values are lower, more of an asset can be gifted than when asset values are higher.
 
            Assume for example, that Client A owned 100,000 shares of Bank of America stock on January 1, 2008.  This stock had a total value of about $4,000,000.   Client A could have made 2008 gifts of $24,000 ($12,000 each) in Bank of America stock to his two children, thus eliminating .6% of the asset from his estate.  On January 1, 2009, the same Bank of America stock was worth $1,400,000.  The client can make gifts in 2009 equal to $26,000 ($13,000 each), thus eliminating 1.8% of the taxable asset.  While the increase from $12,000 to $13,000 may not seem like a big deal, keep in mind that the client can make gifts to any number of gift targets, such as children, grandchildren and in-laws, thus magnifying the effect of the gifting.  Also, the estate tax rate is 45%, meaning that a $13,000 gift has the potential to save $5,850 in federal estate taxes.
 
            If you believe that assets are currently at a very low value and will grow in the future, gifting now results in even more leverage.  The idea is that the future appreciation will occur in the accounts of children and grandchildren, rather than at the senior generation level.  For example, if Client A's gifted Bank of America stock returns to its January 1, 2008 price, it would have a value of about $74,000, all of which would be out of Client A's taxable estate.  While there is, of course, a risk that assets will decline further, we think the current environment presents an opportunity for significantly reducing future estate tax liability.

Some disclaimers:  First, nothing in this email should be construed as legal advice.  Second, an attorney-client relationship may only be established by a formal engagement with our firm.  Third, this email is informational only; you should not act on any legal matters except with the specific advice of your counsel.


Desmond G. Sheridan
 
Isaacson Isaacson Sheridan & Fountain, LLP
Suite 400, 101 W. Friendly Ave. (27401)
P.O. Box 1888 (27402)
Greensboro, North Carolina
 
(336) 275-7626
 
 
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